How to Qualify for a Home Loan
When you look to get a mortgage, there are many qualifications a lender will need you to meet. Knowing how to qualify for a home loan can give you the knowledge to get in the best possible position before starting your mortgage application.
Ready to begin your mortgage application? Start an online application today!
Step 1: Check your credit score and history
Your credit score and history are major factors when determining whether you qualify for a home loan, as well as the rate you could get on your mortgage. Lenders check your credit score and history to determine your creditworthiness and gain an idea of the likelihood you will pay your loan back on time.
Minimum credit score requirements by loan program
Different loan types have varying credit score requirements. Knowing the minimum credit score for each loan program can help you identify which mortgages you could qualify for.
The typical minimum credit scores by loan program are:
- Conventional loan: 620
- FHA loan: 500
- USDA loan: 620
- Jumbo loan: 660
- VA loan: No minimum credit score required, but most lenders look for 580
How to improve your credit score before applying
Here are a few things you could do to help improve your credit score* before applying.
- Pay off or reduce current debts
- Avoid opening any new accounts that may trigger hard credit checks
- Pay all current bills on time
Step 2: Calculate your debt-to-income (DTI) ratio
You can calculate your DTI ratio by dividing all your current expenses from your gross monthly income and then multiplying by 100. If you do not want to do the math yourself or are looking for an easier way to determine your DTI, use an online DTI calculator.
What is a good DTI for a home loan?
A good DTI could help you qualify for and get a better rate on your home loan. The lower your DTI ratio, the better. The maximum DTI ratio that is required changes by loan type. Most lenders look at 36% or lower as the ideal DTI when looking to get a home loan.
The difference between gross income and net income in qualifying
Gross income is the amount of money you make before taxes, while net income is the amount you take home from each paycheck. When looking to qualify for a mortgage, lenders will look at both your gross and net income.
When lenders are calculating your DTI, they will use your gross income to gauge how much you could spend on mortgage payments each month.
Step 3: Verify your employment and income stability
When you look to get a home loan, your lender will verify your employment and income stability. This means lenders will check your W-2 forms, tax returns and bank statements regardless of loan type.
The two-year rule for consistent employment
Traditionally, lenders look for potential borrowers to have two years of consistent employment to help establish your work stability. If you switch jobs but stay in the same field, most lenders will count your time with different employers. Certain loans may allow more flexibility regarding your employment history.
How to qualify for a mortgage if you are self-employed
If you are self-employed, you can still qualify for a mortgage, though your lender may require additional documentation. This could be profit-and-loss statements, personal and business tax returns, and bank statements.
Using bonuses, commissions and overtime to qualify
Bonuses, commissions and overtime could be added to your income to help you qualify for a mortgage. For these to qualify, lenders typically require them to be documented and consistent.
Step 4: Determine your down payment and closing cost savings
Down payment and closing costs are both amounts that borrowers will have to pay at the start of their loan. Determining the amount of savings you can put toward your down payment and closing costs could help you make a realistic budget when starting the homebuying process.
How much money do you really need upfront?
Your upfront cost of buying a home will include down payment and closing costs. Down payment amounts can vary based on your loan type. Typical down payment options can range from 5% to 20%. However, some loans could offer lower options. Closing costs can vary from 2% to 6% of your home’s purchase price.
Using gift funds and grants for your down payment
If you are worried about not being able to cover your down payment amount, there are assistance options available. Some down payment assistance options could include gifts and grants. Check to see if there are any assistance options that could help relieve some of the down payment amounts.
Step 5: Choose the right loan type for your situation
With many loan types available, you will want to make sure you choose the right option for you and your financial situation. Some loans, such as government-backed loans, come with lower qualification requirements.
Qualifying for a conventional loan vs. government-backed loans
Government-backed loans** such as FHA, VA and USDA loans are insured or guaranteed by a federal organization. Conventional loans are issued by a private lender. Because government loans are insured, they can come with higher DTI ratio and lower credit score or down payment requirements compared to conventional loans.
Specific requirements for FHA, VA and USDA loans
Each government-backed loan comes with its own requirements a borrower needs to meet. Here are specific requirements for government-backed loans.
- FHA loan: Your home needs to be a primary residence and have an FHA appraisal for the property.
- VA loan: A borrower needs to be an eligible veteran, active-duty service member or certain member of the National Guard and Reserves.
- USDA loan: Your home needs to be in an eligible rural or suburban area.
Start your homebuying journey today: Get a pre-approval
If you are ready to start your homebuying journey, you can start by getting a mortgage pre-approval.
Pre-approvals will let you know about the home loan that you qualify for. Pre-approvals from a lender will tell you the amount you qualify for, your rate and loan length you qualify for. These pre-approval letters can be used when shopping for a home to show you are a serious buyer and allow you to plan for your monthly payments.
Start your homebuying journey today by beginning an application for your mortgage pre-approval.
*Rate does not provide credit counseling or credit repair services.
**Rate is a private corporation organized under the laws of the State of Delaware. It has no affiliation with the US Department of Housing and Urban Development, the US Department of Veterans Affairs, the Nevada Department of Veterans Services, the US Department of Agriculture, or any other government agency. No compensation can be received for advising or assisting another person with a matter relating to veterans’ benefits except as authorized under Title 38 of the United States Code.
Applicant subject to credit and underwriting approval. Not all applicants will be approved for financing. Receipt of application does not represent an approval for financing or interest rate guarantee. Refinancing your mortgage may increase costs over the term of your loan. Restrictions may apply.
All information provided in this publication is for informational and educational purposes only, and in no way is any of the content contained herein to be construed as financial, investment, or legal advice or instruction. Rate does not guarantee the quality, accuracy, completeness or timelines of the information in this publication. While efforts are made to verify the information provided, the information should not be assumed to be error-free. Some information in the publication may have been provided by third parties and has not necessarily been verified by Rate. Rate its affiliates and subsidiaries do not assume any liability for the information contained herein, be it direct, indirect, consequential, special, or exemplary, or other damages whatsoever and howsoever caused, arising out of or in connection with the use of this publication or in reliance on the information, including any personal or pecuniary loss, whether the action is in contract, tort (including negligence) or other tortious action.
